16-24 year olds watch substantially less TV (50% of watching activities vs 69% for all adults) and more YouTube (8% of watching activities vs 2% for all adults) – see this Tweet from Benedict Evans

That got me wondering what these young YouTubers will watch as they grow older.

Assuming they are going to want to watch premium content like Breaking Bad, and most won’t want to use BitTorrent for the rest of their lives they will have to start paying. The question is what they are going to buy, and I can’t see them going from paying nothing to paying £5.99 a month for a Netflix account, or worse, £29.99 for Sky.

Jim Barksdale, founder of Netscape famously said that “there are only two ways to make money in business: bundling and unbundling”. We’ve seen this a lot in media – iTunes unbundled the album into singles and now Spotify have bundled singles up into an all you can eat subscription.

With TV programmes the major story has been Netflix taking market share from cable and satellite TV companies but that has been substituting one bundle for another rather than unbundling, albeit in an on-demand rather than channel format. I suspect in future we will see a proper unbundling with more market share moving pay per view services. Like iTunes, except with discovery built in. And a UX that doesn’t make me want to scream.

I think there’s a opportunity to build a startup that aggregates the content, makes recommendations, and handles payments, taking a cut on the way. A bit like our portfolio company Thread.com, but for TV. The challenge with this will be timing the startup to coincide with when the content becomes available to aggregate.

eMarketer are predicting that YouTube revenues will hit $5.6bn this year, 50% up on last year (reported in the Guarian). Here are some other relevant facts:

Projections of YouTube’s revenues are increasing over time – in May Morgan Stanley were predicting $4bn

The growth is coming from young people who are watching most of their television online – this is a good example of a behaviour from a fringe group that is likely to become mainstream

Television’s share of advertising budgets has peaked

YouTube is now at 1.7% of global digital advertising spend – more than Twitter

For me there are two big takeaways. Firstly the advertising shift from TV to the internet has started and the trend will only be one way from here. Secondly Google is sitting on a major media asset. Their $1.7bn acquisition of YouTube in 2006 now looks amazingly prescient.

I just read that over 33% of viewing time on YouTube can now be attributed to videos that are 20 minutes or longer – i.e. long form content. There are now 1bn people viewing YouTube each month watching over 6bn hours of videos, so there’s a lot of TV style content being watched on the platform. Moreover, YouTube is growing fast and Google, Machinima, Maker Studios, and many others are investing heavily to bring more professional content to the platform in the hope of extending and even accelerating that growth.

Contrast that to traditional television viewing which is either flat or declining slightly depending on who you read and it is clear who the winner will be. And all this has happened before YouTube is meaningfully available on most people’s televisions.

Streaming media services from companies like Spotify and Netflix have long argued to big media owners that streaming is the way to capture market share back from pirate sites and hence increase revenues. Reed Hastings, CEO of Netflix, put it like this recently (from Torrentfreak):

“Certainly there’s some torrenting that goes on, and that’s true around the world, but some of that just creates the demand,” Hastings says.

Eventually these BitTorrent users may want to switch to Netflix as it’s a much better user experience than torrenting, according to the CEO.

“Netflix is so much easier than torrenting. You don’t have to deal with files, you don’t have to download them and move them around. You just click and watch,” Hastings says.

And there is some evidence that people are indeed switching from free sites to Netflix. According to Hastings, there is evidence that BitTorrent traffic in Canada dropped 50% after Netflix started there three years ago.

But the dependency goes further than this. In an ironic twist Kelly Merryman, Netflix VP of Content Acquisition has said that popularity on file sharing services plays a part in determining which TV-Series Netflix buys.

Google yesterday announced the launch of paid subscriptions for YouTube channels. So far this is only for a pilot group of around 30 hand-picked channels, but they say they are going to expand to a broader list of qualified partners that will operate on a self-service basis. I take that to mean that getting approval to charge for a YouTube channel will be somewhat like getting approval for an app to appear in the Google Play store – most everything that isn’t offensive will get approved.

If so, this is a big moment in the ongoing shift to over-the-top TV. In the five years or so that Google has been operating its YouTube channel programme which allows content owners to keep 55% of ad revenues from their content the amount of premium content viewed on YouTube has sky-rocketed. YouTube channel network companies that like Machinima, Maker Studios and ChannelFlip that provide distribution and monetisation services to content owners have seen amazing month on month growth in videos viewed and are now enjoy billions of video views per month. Most of these views are from teenagers and young adults who use YouTube as a substitute or even replacement for traditional TV. This growth has come when the only form of monetisation available is an ad share with Google. Now that subscriptions are available expect to see more high quality content come to the platform and as history has shown us over and over high quality content brings viewers.

However, whilst this is an exciting moment for those of us looking forward to ditching our cable and satellite subscriptions I don’t think YouTube channels in their current incarnation will be the end game. Firstly, Google’s 45% take of revenues (they offer the same deal for ads and subscriptions) is too high and in the medium to long term they will face meaningful competition and either lose out or shift to taking a substantially smaller cut. Secondly, as Kevin Kelleher wrote on Pando earlier this week the online TV world is splintering into lots of subscription based walled gardens and the user experience is suffering as a result. At a minimum I expect services to arise which allow users to search and discover across all the services they subscribe to, but I suspect also that ‘pay for what you watch’ revenue models might eventually displace subscriptions. Subscriptions are another form of bundle and with good search and discovery and simple payments I think users will pay more when they are only paying for what they want and not having to pay for things they don’t watch.

Netflix announced Q1 results yesterday, and they topped 1bn in quarterly revenues for the first time and reached 33m subscribers. No mean feat. But the numbers that really caught my eye are that Netflix will spend $350m this year delivering its service, and a further $2bn on content rights. Those are some punchy expenses and respresent a significant barrier to entry for anybody else looking to get into the TV streaming game.

I think that leaves the opportunities in TV squarely in the discovery space. Alongside their quarterly results Netflix published a paper on the future of television and one of their predictions is that we will soon see the end of linear TV. I buy into that for lots of reasons, not least the impact that Netflix had with House of Cards because the whole series was available to watch from day 1, but it begs the question of what experience will replace the ‘hit the couch, put your favourite channel on and sit back’ mode of engagement that is so prevalent with TV today. The obvious answer is a clever combination of playlists, social inspiration and algorithmic recommendations.

Netflix, Amazon, Google and Apple will try to own this layer as well, but there maybe space for a startup here, particularly given that consumers may want their discovery service to cover more than just one silo. In the long run it makes sense to me that these discovery services will link directly to the content owners, maybe handling billing and rights management. In that view of the world Netflix’s emerging content business will be much more important to them than their distribution business, which would be cut out of the equation.

Fred Wilson posted yesterday about the emerging battle between Netflix and HBO. Netflix’s strategy of developing their own premium content is in full swing now that House of Cards has been released. For those that haven’t read about it (or, since Friday, seen it) House of Cards is a high budget, all-star-cast 13 episode drama series that Netflix has produced. It was released on Friday, and interestingly, all 13 episodes were made immediately available, so big House of Cards fans can watch the whole lot in one sitting without the torture of wating 13 weeks to find out how it ends. It will be interesting to see if this heralds a change in TV series distribution generally. In ninteenth century England Charles Dickens and other top novellists seriaised their books in newspapers releasing a chapter each week. That practice ended, I assume because people prefer to buy books and consume at their own pace. The same might happen to TV series.

HBO has been producing their own high budget dramas for decades – The Wire is my favourite – and consumers subscribe to the HBO channel much as they can subscribe to Netflix. The big difference is that Netflix goes direct to consumer with their service whilst HBO goes through cable operators. HBO had no choice when they set the business up as their was no web, but there is a choice now.

Fred says in his post that Netflix’s business model is superior because:

Netflix allows you to have a direct relationship with them and use your account on almost every connected device I can think of. HBO requires you to have an account with a cable company and then even if you do, it is hit or miss whether you can use their service on the device you want to.

It is often the case that incumbents don’t respond well to the threat of new entrants because to do so would require them to compete with their existing supply chain which would threaten friendships and most likely undermine revenues and profits in the short term. The other time that incumbents often don’t respond well is of course when to do so would cannibalise their own services. It is not that the management of these companies is stupid and don’t see the threat and opportunity, but rather that on a rational basis the risk-reward analysis of taking the short term hit in the hope of longer term success from a new and untested service doesn’t add up. We, on the startup side of the equation often see the changes as inevitable, but they don’t look that way to incumbents who maybe have less faith in technological change and are hence more open to arguments that the new service won’t compete adquately with what they have at the moment – e.g. streaming video versus cable, or to take an older example VOIP versus traditional telephone. That said, it isn’t uncommon for the rational analysis to be distorted by organisational biases in favour of the status-quo – e.g. over-estimating the importance of voice and/or video quality.

The long heralded shift in viewing away from traditional television towards new services, formats, and devices is now well underway. People are watching the same content via newish services like Netflix and Lovefilm, they are watching new types of content on Youtube and they are increasingly doing all this viewing on mobiles and tablets and on traditional TVs via new delivery devices, particularly games consoles and devices like Apple TV. If you are interested in the next level of detail then take a look at this post from the Singularity University, and this Youtube video of a Nielsen presentation on TV stats.

I’m posting all this today because the stats in the chart below are very striking. Further, in the two years since they were authored these trends have accelerated.

Now that these shifts are firmly established the opportunity for startups is to make the ecosystem work better. Re-imagining TV advertising to work in this new medium is one obvious area of opportunity. Content discovery is another.

The stats for Youtube are impressive – 4bn hours viewed per month, growing at an annualised rate of 50% – but probably more exciting right now is the way they are re-imagining the television experience for both viewers and advertisers.

Elizabeth Murdoch, founder and CEO of ‘traditional’ TV production company Shine, now part of the News Corporation empire made the following points in her MacTaggart lecture to the Edinburgh International Television Festival earlier this year:

1. Significant new players emerge very fast in the online video world:

New forms of content and new audience relationships are being created very rapidly outside our very linear old world. While Hulu and Netflix and Lovefilm, the iPlayer, 4OD and now finally even YouView are all welcome new and varied distribution channels for our made for television content, what’s much more fascinating is the explosive emergence of a made–for-online video category.

Here are a few things I think worth considering: the first is that like the early days of multichannel television, new networks are being built on platforms like YouTube. Machinima, Makers Studio and Big Frame are networks that stunt schedule, cross-promote, cross-sell and commission content – and they are now commanding audiences of up to 120 million subscribers to their hundreds of channels. These are not just channel brands like MTV and Nickleodeon, but networks like Viacom.

2. Content creators are able to make a lot of money just from Youtube:

[Youtube] is now a platform that showcases people like Ray William Johnson who makes more than $1m dollars a year from his comedy channel with over five million subscribers and it’s a platform premiering the big new series by big names like Bryan Singer.

YouTube is providing hundreds of millions of dollars in financial stimulus to its network partners, and using their 800 million unique monthly home page views to curate and promote content.

3. Youtube is enabling brands and talent to engage directly with their fans

My third observation is that brands and talent are using YouTube to create direct to consumer relationships. Michelle Phan is the world’s most popular make-up expert with over 600 million views. Yes – that’s equivalent to a global Olympic audience generated by a 22-year-old putting on Lady Gaga make-up. Earlier this year she asked her fans if they wanted to subscribe for ten dollars a month to her home delivery service. Thirty six thousand of them did in the first 24 hours. She is now turning over something like two million dollars a year and Lancome is now working with her as a distribution platform that could eclipse any single retail relationship.

4. This creates an opportunity to cut out the middle man

Digital platforms can translate audience trust into transactional relationships incredibly efficiently and without the middle men, agents, media buyers or programme makers reliant on broadcast based business models.

Youtube’s opportunity is to capture viewers from traditional TV and it’s biggest challenge is creating a relaxing lean-back experience to rival what we know and love from companies like Sky, BBC and ITV. Their channel and content acquisition strategies are their solutions to lining up content so people can just watch without the hassle of selecting a new video every 2-3 mins. If this works, or they find another UI solution that makes Youtube an effective replacement for traditional television, particularly as per Murdoch’s third point, could well provide the basis for transformation of a significant part of the television industry.

Youtube is also innovating on the advertising side of the business. Their family of TrueView video ad formats allow viewers to skip ads and only charge advertisers when an ad is watched to the end. This sounds like a much much better solution for advertisers and viewers than the current ‘full interrupt but not sure who is watching model’ (assuming the economics work out such that excessive numbers of ads aren’t required).

UK broadcaster ITV announced their results yesterday and the differing fortunes of the two halves of their business show the way forward for traditional TV companies everywhere. The two parts of the ITV business are content production and content distribution. The production business is doing well with shows like Downton Abbey getting large audiences in the UK and selling well abroad, but revenues at the distribution business declined. The good news for ITV shareholders is that investors thought the positives outweighed the negatives and sent the shares to a 52 week high.

I say this is the future for traditional TV companies because distribution (or access) is being rapidly commoditised by the web and the old model of producing content in house and shovelling it out to consumers with limited choice over what to watch is dying fast. Content production and distribution are no longer tied for technical reasons – any show can be streamed or downloaded at any point to any device with a broadband connection (Downton Abbey is available on iTunes in the UK) – making any future coupling purely a business model decision. We are seeing distribution businesses like Netflix, Amazon and Youtube commissioning their own exclusive content to drive subscriptions to their platforms but this will only be effective beyond the margin if both the content and the distribution are best in class. Otherwise consumers will reject the bundle.

Traditional one country broadcasters have a shot at being great content companies (as ITV is showing) but over time their broadcast TV audiences will dwindle and ad rates will fall as more money moves on-line, and in the next few years the distribution sides of their businesses will lose their value. Their only hope is to build big audiences for their web properties, but I see the chances of success here as slim. The US might be different due to the size of the market where Time Warner (owner of HBO) might combine great content production with a great distribution business – but even then the execution challenges of managing artists and techies within the same organisation will be challenging.

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Managing Partner at Forward Partners - on a mission to invest in the UK's best eCommerce companies.

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